oversight

HOME Investment Partnership Program Administrative Costs, Texas

Published by the Department of Housing and Urban Development, Office of Inspector General on 2000-01-27.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                                                                      Issue Date
                                                                             January 27, 2000
                                                                      Audit Case Number
                                                                              00-FW-255-1002




TO:    Katie S. Worsham
       Director, Community Planning and Development, 6AD


FROM:        D. Michael Beard
             District Inspector General for Audit, 6AGA

SUBJECT: HOME Investment Partnership Program Administrative Costs
         Texas Department of Housing and Community Affairs
         Austin, Texas


We have completed a limited review of the direct administrative costs of the HOME Investment
Partnership Program (HOME Program) administered by the Texas Department of Housing and
Community Affairs (TDHCA). We initiated the review after examining an anonymous complaint
that we could not substantiate relating to the TDHCA. We identified problems with how the
TDHCA supported the use of funds drawn down to cover HOME Program administrative costs.
This report contains two findings.

Within 60 days, please give us, for each recommendation in this report, a status report on: (1)
corrective action taken; (2) the proposed corrective action and the date to be completed; or (3)
why action is not considered necessary. Also, please furnish us copies of any correspondence or
directives issued related to the audit.

If you or your staff have any questions, please contact Jerry Thompson, Assistant District Inspector
General, at (817) 978-9309.
Management Memorandum




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00-FW-255-1002             Page ii
Executive Summary
We have completed an audit of administrative costs for the HOME Investment Partnership
Program (HOME Program) of the Texas Department of Housing and Community Affairs
(TDHCA). The audit objectives were to determine if the TDHCA: (1) incurred and
supported administrative costs it charged to the HOME Program in accordance with
program requirements and (2) ensured that administrative costs charged by subrecipients
were supported and eligible under the Program.




  The TDHCA could not             The TDHCA allocated certain payroll and other direct costs
  support certain                 based on budget estimates instead of actual time spent on or
  administrative costs            benefits received by the HOME Program. These budget
  charged to the Program.         based cost allocations were from divisions other than the
                                  HOME Program Office for activities that benefited multiple
                                  programs. In addition, the TDHCA allocated a portion of
                                  the cost of a new client server accounting system without a
                                  supportable allocation basis. As a result, the TDHCA lacks
                                  support for about $1.26 million of administrative costs it
                                  charged to the HOME Program.

                                  The TDHCA did not require its subrecipients to submit
 The TDHCA did not
                                  necessary documents to support draw downs of funds to
 oversee subrecipients’
                                  cover administrative costs in carrying out HOME Program
 administrative costs.
                                  activities. Also, the TDHCA’s monitoring reviews of
                                  subrecipient performance looked at programmatic issues but
                                  not administrative costs. Consequently, the TDHCA could
                                  not support about $408,000 in draw downs for
                                  administrative costs of subrecipients we reviewed.
  Findings discussed with
                                  We provided a draft report to the TDHCA on December 16,
  TDHCA officials.
                                  1999, and they issued a response on January 14, 2000. We
                                  had an exit conference with TDHCA officials on January 20,
                                  2000. The TDHCA said the report highlights opportunities
                                  to improve the administration of the Program which its staff
                                  has recognized. TDHCA disagreed that it does not have
                                  assurance that administrative costs of the Department
                                  charged to the HOME Program were reasonable or
                                  appropriate in relation to the benefits received. Also, the
                                  TDHCA did not agree its subrecipients received and spent
                                  HOME Program funds to administer its programs without
                                  required oversight. They stated they recognized the need to
                                  improve its documentation standards to clearly demonstrate
                                  that expenditures charged or allocated to the HOME
                                  Program are allowable and adequately supported. TDHCA

                                          Page iii                             00-FW-255-1002
Executive Summary


                    officials appeared to be responsive to the recommendations.
                    We summarized the response in the findings and included a
                    full copy of the response as Appendix B.




00-FW-255-1002        Page iv
Table of Contents

Management Memorandum                                           i


Executive Summary                                             iii


Introduction                                                   1


Findings

1    The TDHCA Could Not Support Certain Administrative             5
     Costs Charged to the Program

2    The TDHCA Did Not Oversee Its Subrecipients’             11
     Administrative Costs


Management Controls                                           15



Appendices
      A Schedule of Questioned Costs
17

      B Auditee Comments
19

      C Distribution
25




                               Page v                00-FW-255-1002
Table of Contents




Abbreviations
       CFR            Code of Federal Regulations
       HUD            U.S. Department of Housing and Urban Development
       OIG            Office of Inspector General
       OMB            Office of Management and Budget
       HOME Program   HOME Investment Partnerships Program
       TDHCA          Texas Department of Housing and Community Affairs
       PJ             Participating Jurisdiction




00-FW-255-1002                     Page vi
Introduction
 Background        The Texas Department of Housing and Community Affairs
                   (TDHCA) receives and administers HUD’s HOME
                   Investment Partnership Program (HOME) funds for the State
                   of Texas. The State of Texas receives an annual allocation
                   of HOME funds from HUD and distributes the funds
                   throughout the state. Any unit of Local Government, Public
                   Housing Authority, Community Housing Development
                   Organization, other non-profit and for-profit organization
                   that is not within a participating jurisdiction is eligible to
                   apply for HOME funds through the TDHCA’s HOME
                   Program. The TDHCA provides technical assistance and
                   monitoring to all subrecipient administrators of the program
                   to ensure all participants meet and follow the necessary
                   requirements. The TDHCA is governed by a Board
                   composed of nine members, appointed by the Governor with
                   the consent of the Texas Senate, and an Executive Director
                   appointed by the Board. Within the TDHCA, the HOME
                   Investment Partnerships Program Office has responsibility
                   for administering the program. The TDHCA’s offices and
                   records are located at 507 Sabine, Austin, Texas.

                   The HOME Program was created in November 1990 under
                   Title II of the National Affordable Housing Act. Under the
                   HOME Program HUD allocates funds by formula among
                   eligible State and local governments to strengthen public-
                   private partnerships and to expand the supply of decent,
                   safe, sanitary, and affordable housing for very low-income
                   and low-income families. State and local governments that
                   become participating jurisdictions may use HOME funds to
                   carry out multiyear housing strategies through acquisition,
                   rehabilitation, and new construction of housing, and tenant-
                   based rental assistance.

                   The TDHCA is authorized to use up to 10 percent of its
                   HOME Program allocation for administrative costs
                   necessary to carry out the Program. The TDHCA shares the
                   funds authorized for administrative costs with its
                   subrecipients. The following is a breakdown of the total
                   funds received and the amounts available for administrative
                   costs to carry out the Program during the 3 fiscal years
                   ended August 31, 1999.



               HOME Funds Allocated       Funds Available to

                            Page 1                               00-FW-255-1002
Introduction


                  Fiscal Year       to the State      Administer the Program
                                     (millions)             (millions)
                      1997            $ 32.69                $ 3.27
                      1998               34.24                  3.42
                      1999               37.06                  3.70
                 Totals               $103.99                $10.39




                                We began the review as a result of an anonymous complaint
   Objectives, Scope, and
                                regarding one of the TDHCA’s subrecipients. We were
   Methodology
                                unable to substantiate the complaint. However, based on the
                                work performed, we identified weaknesses in how the
                                TDHCA supported its HOME Program administrative costs.
                                In October 1998, we initiated an audit to address the
                                apparent problems. Our audit objectives were to determine
                                if the TDHCA: (1) properly supported administrative costs
                                in accordance with program requirements and (2) ensured
                                that subrecipients adequately supported administrative costs
                                charged to the HOME Program. Our audit procedures
                                included:

                                •     Interviewing TDHCA and HUD officials.

                                •     Reviewing Program regulations and related
                                      requirements.

                                •     Reviewing financial reports prepared by independent
                                      auditors.

                                •     Testing expenses charged to the Program.

                                •     Analyzing TDHCA’s direct cost allocation method,
                                      Program budgets and expenditures for fiscal years 1997,
                                      1998, and 1999.

                                •     Performing a file review of 19 open and active contracts
                                      as of October 1998. The 19 contracts included all 7
                                      contracts with the Texas State Affordable Housing
                                      Corporation entered into during the fiscal years 1995
                                      through 1997 and 12 of 59 fiscal year 1996 and 1997
                                      contracts with other subrecipients that drew down funds
                                      for administrative costs. The review included an
                                      examination of: (1) agreements; (2) administrative
                                      drawdown requests and supporting documentation; and
                                      (3) monitoring reports.

00-FW-255-1002                             Page 2
                                              Introduction



The audit generally covered the period February 1996
through February 1999. We performed the audit from
October 1998 through May 1999, and conducted our audit in
accordance with generally accepted government auditing
standards.




    Page 3                                00-FW-255-1002
Introduction




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00-FW-255-1002      Page 4
                                                                                                                         Finding 1



        The TDHCA Could Not Support Certain
      Administrative Costs Charged to the Program
The TDHCA did not have acceptable support for certain direct administrative charges made
to the HOME Program. The method used for allocating direct costs failed to show how the
allocated costs benefited the HOME Program. The TDHCA allocated employees’ payroll
and payroll related benefits for employees working on multiple programs based on pre-
determined budget percentages. The TDHCA did not base its allocations on actual time
worked on the Program. For non-salary costs the TDHCA allocated charges to the Program
based on available funding developed through the budgetary process. In addition, the
TDHCA could not support its cost allocation to the Program for a new client server
accounting system. As a result, neither the TDHCA nor HUD had assurance that about $1.26
million in administrative costs to the HOME Program were reasonable or appropriate in
relation to the benefits received.



                                                    Title 24, Code of Federal Regulations (CFR), Section
     HUD Requirements                               92.207 allows a participating jurisdiction to expend up to 10
                                                    percent of HOME Program funds, for payment of reasonable
                                                    administrative and planning costs necessary to carry out the
                                                    Program1.

                                                    Title 24, CFR, Section 92.505 states that a participating
                                                    jurisdiction must follow uniform administrative
                                                    requirements of Office of Management and Budget (OMB)
                                                    Circular A-87, and certain requirements of Title 24, CFR,
                                                    Part 85 apply.

                                                    OMB Circular A-87, establishes principles and standards
     OMB Requirements                               for determining allowable costs for federal awards carried
                                                    out through grants, cost reimbursement contracts, and other
                                                    agreements with State and local governments and federally
                                                    recognized Indian tribal governments.

                                                    Attachment A of the circular states a cost is allocable to a
                                                    particular cost objective if the goods or services involved
                                                    are chargeable or assignable to it, in accordance with
                                                    relative benefits received. Direct costs are those that can be

1
    The TDHCA gives its subrecipients 4 percent of the available 10 percent administrative fees to enable the subrecipient to carry
    out the HOME Program. The TDHCA retains the remaining 6 percent to cover its own expenses in overseeing the entire
    Program within the State.

                                                                Page 5                                           00-FW-255-1002
Finding 1


                                                  identified specifically to the performance of the federal
                                                  award. Typical direct costs chargeable to an award are:
                                                  (1) compensation of employees for the time devoted to the
                                                  award; (2) cost of materials, and equipment acquired,
                                                  consumed, or expended specifically for the purpose of the
                                                  award; and (3) travel expense incurred specifically to carry
                                                  out the award.

                                                  Attachment B of the circular states that where employees
                                                  work on multiple activities (programs) or cost objectives, a
                                                  distribution of their salaries or wages will be supported by
                                                  personal activity reports or equivalent documentation. They
                                                  must: (1) reflect an after-the-fact distribution of the actual
                                                  activity for each employee and (2) be prepared at least
                                                  monthly and signed by each employee. Budget estimates or
                                                  other distribution percentages determined before the
                                                  services are performed do not qualify as support.

     Allocations of salaries and                  The TDHCA did not maintain necessary documentation to
     benefits were not                            support payroll costs 2 allocated to the HOME Program. 3
     supported.                                   According to key personnel, the TDHCA has no requirement
                                                  for employees who work on multiple activities to prepare
                                                  activity reports that reflect actual work chargeable to the
                                                  Program. Instead, the TDHCA charged payroll costs for
                                                  employees working on multiple activities in divisions other
                                                  than the HOME Program Office based on budget estimates.
                                                  The activity heads would provide the percentage estimates
                                                  annually and the TDHCA would charge the actual payroll
                                                  costs based on these percentages and available funding for
                                                  the programs. As a result, the TDHCA could not support the
                                                  $860,478 charged the Program for payroll costs for the
                                                  employees working on multiple programs.

                                                  In fiscal years 1997 and 1998, the unsupported payroll
                                                  charges were for partial salaries of employees of the
                                                  Compliance Monitoring Division, Housing Programs
                                                  Division Administration, Credit Department, and the Office
                                                  of Colonia Initiatives. In 1999, the TDHCA charged partial
                                                  salaries of employees of only the Compliance Monitoring
                                                  Division and the Office of Colonia Initiatives. The
                                                  following table shows the number of employees within those
                                                  divisions that the TDHCA charged a predetermined

2
    Payroll costs include both salaries and related payroll expenses (i.e., insurance and retirement costs).
3
    TDHCA properly charged and supported (except as noted later in the finding) direct costs to the Program for its HOME Program
    Division. Salaries, payroll related costs, and non-payroll costs for employees working in other divisions that received HOME
    administrative funds were unsupported.

00-FW-255-1002                                              Page 6
                                                                                                                     Finding 1


                                                  percentage of payroll and related costs and the total amount
                                                  charged to the HOME Program by fiscal year.4

                                                          State           Employees with           Unsupported Payroll and
                                                       Fiscal Year        Predetermined            Related Costs Charged to
                                                                          Percentages                      Program
                                                          1997                   18                        $332,793
                                                          1998                   25 ½                      $391,924
                                                          19995                  22                        $135,761

                                                  Contrary to OMB Circular A-87, the TDHCA did not have
     Non-payroll costs were                       an acceptable method to allocate non-payroll direct costs to
     unsupported.                                 the HOME Program for activities or costs that support the
                                                  multiple programs. These included costs such as rent,
                                                  utilities, travel, office equipment, and supplies for activities
                                                  of the Compliance Monitoring Division, Housing Program
                                                  Administration, Credit Department, and Office of Colonia
                                                  Initiative. TDHCA based its budget for these non-payroll
                                                  costs on available funding from the programs the activity
                                                  supported. TDHCA then allocated the cost to these
                                                  programs based on the established budgets. During the
                                                  period September 1996 through February 1999, the TDHCA
                                                  allocated $209,055 in non-salary related costs in this
                                                  manner to the HOME Program. According to OMB Circular
                                                  A-87, a cost is allocable if the goods and services involved
                                                  are chargeable or assignable to the activity in accordance
                                                  with relative benefits received.

                                                  Certain cost elements of these activities’ overall operations
                                                  received a portion of its budget from the HOME Program.
                                                  But, the Department cannot support the actual cost benefit to
                                                  the Program as required.

                                                  The TDHCA could not adequately support direct charges to
     Other unsupported                            the HOME Program Division to convert its operations to a
     administrative costs.                        new client server accounting system. Between September
                                                  1997 and August 1998, TDHCA paid about $892,789 for
                                                  this conversion. The HOME Program picked up $193,250
                                                  of the costs. Under its normal allocation procedures, based
                                                  on the HOME Program Division’s full-time equivalent
                                                  employees, the TDHCA would have charged the Division
                                                  $63,852 for its cost of the conversion. 6 However, without

4
    The State of Texas has a September 1 through August 31 fiscal year.
5
    Includes the period September 1, 1998, through February 28, 1999.
6
    The TDHCA allocates department-wide cost to the HOME Program based on a percentage determined by dividing the number of
    full-time equivalent (FTE) positions in the HOME Program Division by the total department’s FTEs. For the State’s fiscal year

                                                         Page 7                                              00-FW-255-1002
Finding 1


                                                   support for benefit to the Program, we are not certain this
                                                   method would have been acceptable. TDHCA’s staff made
                                                   the following statements in support of the allocation: (1) the
                                                   expenditure of funds for the conversion can be classified as
                                                   an unique capital outlay of funds, and not allocable
                                                   throughout the entire TDHCA; (2) to-date the conversion
                                                   primarily effects only the federal programs administered by
                                                   TDHCA7; and (3) it took more time to interface and convert
                                                   the HOME Program database, resulting in a large allocation
                                                   of the cost.

                                                   Attachment B, Section 6, of OMB Circular A-87 provides
                                                   that electronic data processing services are allowable (but
                                                   see Section 19, Equipment and other capital expenditures).
                                                   Section 19 c provides that capital expenditures for
                                                   equipment, including replacement equipment, other capital
                                                   assets, and improvements which materially increase the
                                                   value or useful life of equipment or other capital assets are
                                                   allowable as a direct cost when approved by the awarding
                                                   agency.

                                                   The following table identifies the activities and the amount
                                                   paid for the conversion by each.

                                                           Activity/Program Name                           Amount Allocated
                                               Manufactured Housing Division                                $278,165.02
                                               Office of the Chief Financial Officer                        $201,675.09
                                               HOME Program (Federal)                                       $193,250.57
                                               Community Services Block Grant (Federal)                      $97,349.41
                                               Low Income Housing Energy Assistance                          $97,349.41
                                               (Federal)
                                               Financial Services Division                                     $25,000.00

                                                   During the audit, TDHCA staff developed and furnished us
                                                   information in an effort to support the allocation. The
                                                   information showed how the contractor allocated time and
                                                   costs of the conversion according to tasks.8 The additional
                                                   information furnished proposed to allocate the conversion
                                                   cost to five federal programs and one state activity. 9

    1998, the HOME Program Division had an allocation rate of 7.152 percent. Therefore, the HOME Program Division’s share
    would be calculated: $892,789 x 7.152 = $63,852.
7
    The exception is the Manufactured Housing Division. This Division is responsible for and administers the manufactured housing
    program as required by the Texas Manufactured Housing Standards Act. Also, this Division administers parts of the National
    Manufactured Housing Construction and Standards Act of 1974 on behalf of HUD.
8
    The information TDHCA provided to support its allocation also included the price of the software package ($293,000) not included
    in the costs we questioned. TDHCA did not allocate any of the software costs to the HOME Program. Therefore, we consider
    this issue moot for the purpose of our audit since the actual payment did not include HOME Program funds.
9
    The State activity was the Manufactured Housing Division.

00-FW-255-1002                                               Page 8
                                                                         Finding 1


                    However, TDHCA received federal funds from ten
                    individual grant programs of which eight are awards for
                    greater than $1 million. The TDHCA needs to perform
                    further analysis for review and consideration by HUD as to
                    whether to approve the cost of the conversion to be charged
                    as a direct cost to the HOME Program.




Auditee Comments    TDHCA officials agree with the dollar amounts stated in the
                    finding but do not agree that $1.26 million are unsupported.
                    They said they also do not agree that TDHCA does not have
                    assurance that administrative costs of the Department
                    charged to the HOME Program were reasonable or
                    appropriate in relation to the benefits received. However,
                    they agreed that staff working on multiple programs had not
                    been required to keep time sheets based on their actual time
                    for each program, as required by OMB Circular A-87. They
                    stated they recognized the need to improve its documentation
                    standards to clearly demonstrate that expenditures charged
                    or allocated to the HOME Program are allowable and
                    adequately supported. They said they believed we
                    misinterpreted statements attributed to the Manager of
                    Budget and Planning concerning the lack of rationale and
                    support for charging non-payroll costs to the HOME
                    Program.

                    TDHCA officials stated the HOME Program benefited from
                    the new client server based accounting software package.
                    They said this system provided an in-house accounting
                    system tailored to the Department’s programs as opposed to
                    being an internal user of the Comptroller’s Uniform
                    Statewide Accounting System. Officials said they will
                    provide support for the benefit to the HOME Program.



                    TDHCA could provide us no adequate documentation to
OIG Evaluation of   support the costs. Since TDHCA officials indicated we
Comments            misinterpreted the comments from the Manager of Budget
                    and Planning relating to the lack of rationale for allocating
                    certain costs, we removed the reference to the comments.
                    However, the comments from the TDHCA officials did not
                    change our position on the unsupported costs. Their
                    comments indicate they will be responsive to the



                        Page 9                                    00-FW-255-1002
Finding 1


                   recommendations and they will provide HUD documentation
                   supporting the reasonableness of its budget allocations.




 Recommendations   We recommend HUD’s Texas State Office of Community
                   Planning and Development require the TDHCA to:

                   1A. Establish and implement an appropriate method for
                       allocating direct costs that meets federal cost
                       principles, including actual activity time reports for
                       personnel salaries and related costs chargeable to
                       multiple programs.

                   1B. Either provide adequate support or pay back to the
                       HOME Program from non-federal funds the $860,478
                       in payroll and related costs allocated based on pre-
                       determined budgeted percentages.

                   1C. Either provide adequate support or pay back to the
                       HOME Program from non-federal funds the $209,055
                       in non-salary related costs allocated to the Program
                       based on budgeted amounts.

                   1D. Provide adequate support for your review and
                       approval, or pay back to the HOME Program the
                       $193,250 allocated to the HOME Program for the new
                       client server accounting system.

                   1E. Ensure that any direct administrative costs charged to
                       the HOME Program after February 28, 1999, are
                       adequately supported or paid back to the Program.




00-FW-255-1002            Page 10
                                                                                                                          Finding 2



       TDHCA Did Not Oversee Its Subrecipients’
               Administrative Costs
TCHCA’s subrecipients received and spent HOME Program funds to administer its
programs without required oversight. The TDHCA did not require its subrecipients to submit
necessary documentation to support requests for funds to cover administrative costs. Also,
when the TDHCA monitored its subrecipients it did not include examining the propriety of
administrative costs as part of the review. Consequently, the TDHCA and HUD have no
assurance the expenditures were supported and eligible.



                                                    Each participating jurisdiction (PJ) must establish and
     HUD Requirements
                                                    maintain sufficient records to enable HUD to determine
                                                    whether the PJ meets the recordkeeping requirements of 24
                                                    CFR 92.508.

                                                    The PJ is responsible for ensuring that HOME funds are
                                                    used in accordance with all program requirements. The use
                                                    of State recipients, subrecipients, or contractors does not
                                                    relieve the PJ of this responsibility. A jurisdiction must
                                                    enter into a written agreement with the subrecipient ensuring
                                                    compliance with HOME Program requirements. The
                                                    agreement must specify: (1) that all uniform administrative
                                                    requirements (OMB Circular A-87, and 24 CFR 85) will be
                                                    complied with; (2) the records and reports that must be
                                                    maintained or submitted to assist the jurisdiction in meeting
                                                    its recordkeeping and reporting requirements; (3) not to
                                                    request disbursement of funds until the funds are needed for
                                                    payment of eligible costs; and (4) each request must be
                                                    limited to the amount needed (24 CFR 92.504).

                                                    Subrecipients did not submit, nor did the TDHCA require
     TDHCA did not review
     subrecipient                                   source documents to support draw down requests to cover
     administrative costs.                          administrative costs. We attribute this to non-specific and
                                                    ambiguous contract provisions, and a lack of adequate
                                                    management controls.10 As a result, the TDHCA had no
                                                    assurance that subrecipients used the funds it provided for
                                                    administrative purposes in accordance with Program
                                                    requirements.


10
     Management controls include the processes for planning, organizing, directing, and controlling program operations.

                                                              Page 11                                            00-FW-255-1002
Finding 2


                                                    We examined the contract files for 19 subrecipients. The 19
     Lack of supporting
                                                    contracts included all 7 contracts with the Texas State
     documentation in contract
                                                    Affordable Housing Corporation entered into during the
     files.
                                                    fiscal years 1995 through 1997 and 12 of 59 fiscal year
                                                    1996 and 1997 contracts with other subrecipients that drew
                                                    down funds for administrative costs. Our review was to
                                                    ascertain whether subrecipients adequately supported draw
                                                    down requests for funds to cover administrative costs, and
                                                    whether TDHCA monitoring reviews covered subrecipient
                                                    administrative costs. The review results for the sample
                                                    disclosed that as of May 1999, the subrecipients drew down
                                                    $424,491 to cover administrative costs. Documents
                                                    contained in the contract files at that time supported only
                                                    $16,000 in draw downs. Files did not contain
                                                    documentation to support the remaining $408,491. Further,
                                                    monitoring reviews conducted by the TDHCA only
                                                    addressed programmatic issues and did not include an
                                                    examination of administrative costs. As a result, TDHCA
                                                    was less than successful in fulfilling its responsibility to
                                                    ensure that subrecipients incur HOME Program
                                                    administrative costs in accordance with Program
                                                    requirements.

                                                    Although the contracts between the TDHCA and
     Contracts did not require
                                                    subrecipients identified Program requirements by reference
     supporting documentation
                                                    to regulations, they did not require subrecipients to submit
     and may be misleading.
                                                    documentation to support draw downs to cover
                                                    administrative costs. Also, one provision in the contracts
                                                    contradicts HOME Program requirements. As evidenced
                                                    above, subrecipients provided the TDHCA no source
                                                    documentation as required.11 In most instances,
                                                    subrecipients did not identify the nature and amount of the
                                                    expenses. However, TDHCA is ultimately responsible for
                                                    ensuring that subrecipients use HOME funds in accordance
                                                    with program requirements.12

                                                    The contradictory provision in the contracts basically
                                                    allows the subrecipient to draw down the available funds
                                                    prior to their need, and ties the use of funds provided for
                                                    administrative costs to the percentage of completion of the
                                                    project rather than based on actual administrative expenses.
                                                    The contract says:


11
     24 CFR 92.508 requires each participating jurisdiction to establish and maintain sufficient records to enable HUD to determine if
     the requirements of this part are met.
12
     This requirement is outlined in 24 CFR 92.504 (a).

00-FW-255-1002                                                 Page 12
                                                                         Finding 2


                       “Department will grant the Administrator an amount
                       equal to four percent (4%)… of the Project Award to
                       cover administrative expenses incurred directly
                       relating to this contract. Administrative fees shall be
                       funded by the Department to Administrator based on a
                       percentage of completion of the project. Administrator
                       shall be allowed to draw twenty-five percent (25%) of
                       the administrative fees at the initial stage of the
                       project, with the remaining seventy-five (75%) funded
                       on a percentage of completion basis. At any given
                       time, the allowable administrative fees would be equal
                       to the initial twenty-five (25%) set-up draw, plus the
                       percentage of completion draw.”

                   Based on the above provision an uninformed subrecipient
                   could infer that the 4 percent set aside for administrative
                   costs is an entitlement for administering the contract. In fact,
                   the use of administrative fees must be based on actual
                   expenses and supported by documentation.



                   TDHCA officials did not agree that subrecipients received
Auditee Comments   and spent HOME Program funds to administer its programs
                   without required oversight. TDHCA officials said they have
                   historically relied on on-site monitoring visits to ensure that
                   draw downs for administrative costs are supported by
                   proper source documentation. However, they are enhancing
                   their on-site monitoring processes to help ensure that
                   subrecipient administrative expenditures are allowable and
                   supported. They stated they recognized the need to improve
                   its documentation standards to clearly demonstrate that
                   expenditures charged or allocated to the HOME Program are
                   allowable and adequately supported. They are planning to
                   provide subrecipients with an Administrative Draw Manual
                   that will include requirements for support documentation.
                   TDHCA will clarify the Administrative Costs section of the
                   subrecipient contract and will enhance its monitoring
                   function to ensure it is operating as effectively and
                   efficiently as possible. TDHCA has initiated the task of
                   gathering detailed support documentation from subrecipients
                   for administrative fees.




                      Page 13                                     00-FW-255-1002
Finding 2


                      Although TDHCA officials disagree with our statement that
  OIG Evaluation of   TDHCA did not provide required oversight of its
  Comments            subrecipients’ administrative costs, they could not provide
                      evidence they included a review administrative costs in their
                      monitoring reviews. Therefore, their comments do not
                      change our position. Their comments indicate they
                      recognize the opportunities for improvement and will be
                      responsive to our recommendations.



                      We recommend HUD’s Texas State Office of Community
 Recommendations      Planning and Development require the TDHCA to:

                      2A. Establish and implement procedures to ensure that
                          draw downs for administrative costs are supported by
                          proper source documentation.

                      2B. Consider preparing contracts that are more user
                          friendly and less misleading for subrecipients to use
                          and follow.

                      2C. Review all other subrecipients’ administrative fee
                          draw downs not included in our sample to ensure they
                          are adequately supported, and repay the HOME
                          Program from non-federal funds if any draw downs are
                          not supported or supportable.

                      2D. Either support or pay back to the HOME Program from
                          non-federal funds the $408,491 in unsupported
                          administrative fees drawn by subrecipients.




00-FW-255-1002               Page 14
Management Controls
In planning and performing our audit, we obtained an understanding of the management
controls that were relevant to our audit. Management is responsible for establishing
effective management controls. Management controls, in its broadest sense, include the plan
of organization, methods, and procedures adopted by management to ensure that its goals
are met. Management controls include the processes for planning, organizing, directing, and
controlling program operations. They include the systems for measuring, reporting, and
monitoring program performance.


                                   We determined the following management controls were
  Relevant Management              relevant to our audit objectives:
  Controls
                                   •   Allocation of administrative costs to the HOME Program
                                       and

                                   •   Monitoring administrative fees utilized by subrecipients.

                                   We assessed the relevant controls identified above.

                                   It is a significant weakness if internal controls do not give
  Significant Weaknesses           reasonable assurance that resource use is consistent with
                                   laws, regulations, and policies: that resources are
                                   safeguarded against waste, loss, and misuse: and that
                                   reliable data are obtained, maintained, and fairly disclosed
                                   in reports. Based on our review, we believe the following
                                   items are significant weaknesses:

                                   •   The TDHCA lacked necessary administrative controls
                                       over how it allocates salary and non-salary costs for
                                       employees whose duties require working on multiple
                                       programs (Finding 1).

                                   •   The TDHCA did not ensure that subrecipients properly
                                       supported and used its administrative fees either: (1) at
                                       the time of drawdown or (2) during monitoring reviews
                                       (Finding 2).




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Management Controls




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00-FW-255-1002           Page 16
                                                                                                                   Appendix A


Schedule of Questioned Costs


                                                                                     Type of Questioned Costs
           Issue                                                                        Unsupported 1/


1B Payroll and Related Costs                                                                  $860,478

1C Non-Salary Related Costs                                                                    209,055

1D New Client Server Accounting System                                                         193,250

2D Administrative Fees                                                                         408,491




1
    Unsupported costs are costs charged to a HUD-financed or HUD-insured program or activity and eligibility cannot be determined
    at the time of audit. The costs are not supported by adequate documentation or there is a need for a legal or administrative
    determination on the eligibility of the cost. Unsupported costs require a future decision by HUD program officials. This decision,
    in addition to obtaining supporting documentation, might involve a legal interpretation or clarification of Departmental policies and
    procedures.




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Appendix A




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00-FW-255-1002      Page 18
                                Appendix B

Auditee Comments




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Appendix B




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             Appendix B




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Appendix B




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             Appendix B




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Appendix B




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00-FW-255-1002      Page 24
                                                                                   Appendix C

Distribution
Secretary's Representative, 6AS
Comptroller, 6AF
Director, Accounting, 6AAF
Director, CPD, 6AD (4)
Saul N. Ramirez, Jr., Deputy Secretary, SD (Room 10100)
Kevin Simpson, Deputy General Counsel, CB (Room 10214)
Jon Cowan, Chief of Staff, S (Room 10000)
B. J. Thornberry, Special Asst. to the Deputy Secretary for Project Management (Room 10100)
Joseph Smith, Acting Assistant Secretary for Administration, A (Room 10110)
Hal C. DeCell III, A/S for Congressional and Intergovernmental Relations, J (Room 10120)
Ginny Terzano, Sr. Advisor to the Secretary, Office of Public Affairs, W (Room 10132)
Roger Chiang, Director of Scheduling and Advance (Room 10158)
Howard Glaser, Counselor to the Secretary, S (Room 10218)
Rhoda Glickman, Deputy Chief of Staff, S (Room 10226)
Todd Howe, Deputy Chief of Staff for Operations, S (Room 10226)
Jacquie Lawing, Deputy Chief of Staff for Programs & Policy, S (Room 10226)
Patricia Enright, Deputy A/S for Public Affairs, W (Room 10222)
Joseph Hacala, Special Asst for Inter-Faith Community Outreach (Room 10222)
Marcella Belt, Executive Officer for Admin Operations and Management (Room 10220)
Karen Hinton, Sr. Advisor to the Secretary for Pine Ridge Project (Room 10216)
Gail W. Laster, General Counsel, C (Room 10214)
Armando Falcon, Office of Federal Housing Enterprise Oversight (Room 9100)
William Apgar, Assistant Secretary for Housing/FHA, H (Room 9100)
Susan Wachter, Office of Policy Development and Research (Room 8100)
Cardell Cooper, Assistant Secretary for CPD, D (Room 7100)
George S. Anderson, Office of Ginnie Mae, T (Room 6100)
Eva Plaza, Assistant Secretary for FHEO, E (Room 5100)
V. Stephen Carberry, Chief Procurement Officer, N (Room 5184)
Harold Lucas, Assistant Secretary for Public & Indian Housing, P (Room 4100)
Gloria R. Parker, Chief Information Officer, Q (Room 8206, L’Enfant Plaza)
Frank L. Davis, Director, Office of Dept Operations and Coordination, I (Room 2124)
Office of the Chief Financial Officer, F (Room 2202)
Edward Kraus,, Director, Enforcement Center, 200 Portals Bldg., Wash.D.C. 20024
Donald J. LaVoy, Acting Director, REAC, 800 Portals Bldg., Wash D.C. 20024
Ira Peppercorn, Director, Office of MF Assistance Restructuring, 4000 Portals Bldg.,
       Wash. D.C. 20024
Mary Madden, Assistant Deputy Secretary for Field Policy & Mgmt, SDF (Room 7108) (2)
Deputy Chief Financial Officer for Operations, FF (Room 2202)
David Gibbons, Director, Office of Budget, FO (Room 3270)
FTW ALO, AF (2)
HQ ALO CPD, DOT (Room 7220) (2)
Dept. ALO, FM (Room 2206) (2)
Acquisitions Librarian, Library, AS (Room 8141)



                                           Page 25                             00-FW-255-1002
Appendix C


Director, Hsg. & Comm. Devel. Issues, US GAO, 441 G St. NW, Room 2474
      Washington, DC 20548 Attn: Judy England-Joseph
Henry A. Waxman, Ranking Member, Comm. on Govt Reform,
      House of Rep., Washington, D.C. 20515
The Honorable Fred Thompson, Chairman, Comm. on Govt Affairs,
      U.S. Senate, Washington, D.C. 20510
The Honorable Joseph Lieberman, Ranking Member, Comm. on Govt Affairs,
      U.S. Senate, Washington, D.C. 20510
Cindy Fogleman, Subcomm. on Gen. Oversight & Invest., Room 212,
      O'Neill House Ofc. Bldg., Washington, D.C. 20515
The Honorable Dan Burton, Chairman, Committee on Govt Reform,
      House of Representatives, Washington, D.C. 20515
Deputy Staff Director, Counsel, Subcommittee on Criminal Justice, Drug Policy & Human
      Resources, B373 Rayburn House Ofc. Bldg., Washington, D.C. 20515
Steve Redburn, Chief, Housing Branch, Office of Management and Budget
      725 17th Street, NW, Room 9226, New Exec. Ofc. Bldg., Washington, D.C. 20503
Director, Office of Supportive Services, PRS (Room 4106)
Inspector General, G
State of Texas, TDHCA (2)
Texas State Auditor




00-FW-255-1002                             Page 26